Page 21 - Business Insights Technology Industry

NEXUS & states to issue rulings on how certain technologies be very complex due to their sheer volume, and
should be taxed, giving more clarity than even a these laws frequently change as states seek new
ways to generate revenue. Failure to collect sales
few years ago.
SALES TAX Let’s go back to the example of the company that seller and its officers personally responsible, and
tax can result in taxing authorities holding the
has nexus in New York, California, and Illinois. can be a major risk and burden if not handled
Assume that the company has determined that properly. Companies should take the time to
its service is ultimately an information service understand and address this issue now, before it
facilitated by technology, and the information is becomes too impractical to do so.
O ne of the most challenging taxation within any other not considered private in nature. As such, sales
to New York are subject to sales tax, but sales
issues that technology companies face states, the company
is sales tax. Unlike income tax, which does not have to even in California and Illinois are not. Additionally,
is generally the same between federal tax and worry about sales tax in the the company has a customer in Florida, but does
state tax, just at different rates, sales tax has a other states since it has no nexus not have nexus there, so no further determination
different base (some transactions may be taxable in those stats. The buyers, however, will is required as without nexus it is not required to
in one state but not another) for each of the fifty have to consider if responsible to remit any charge sales tax there.
states and then different rates at the state and use tax in those states.
even local county levels. Further compounding Registrations & Filings
this issue is the speed at which technology Sales Tax
changes as opposed to state tax laws, which are Once a company has determined that it’s subject
normally years behind technological changes. Once a determination has been made if the to sales tax in a given state, it will then need to
Trying to fit innovative new technologies into company has nexus within a state, it must register as a sales tax vendor within that state.
older definitions leads to more confusion. then consider the taxability of the transaction. As an aside, companies will also need to register
As stated prior, each state has a different for authority to do business with the secretary of
Nexus definition of what is considered a taxable sale. state for any state in which it has nexus. These
Technology companies are often either in the registrations usually require some pedigree
To start, in order to even have an obligation to software (including SaaS and physical software) information, such as Employer Identification
charge sales tax, a company must first have a or service areas. For most states, delivery of Number (EIN), name, name of officers and
physical nexus with that state. States intentionally physical prewritten software constitutes a sale registered agents (official in state addresses if
define “nexus” broadly and vaguely so as to not at retail, and sales tax is due. Some states have no office in the state), along with statutory filing
limit their tax base; however, “nexus” generally determined that SaaS, electronic delivery of fees.
means that you have an employee or office software, and electronic goods are also sales at
within that space or make continued, habitual, retail and therefore subject to tax (New York, for Once registered, the company begins to collect
and repeated visits to that state. As states have example), while others have ruled that SaaS does sales tax as a “trust fund,” money collected on
become more revenue-hungry, they continue to not constitute a taxable transaction. Technology behalf of a governmental agency. Each state has
expand what constitutes nexus, including the companies also need to look at the “true a different filing frequency for sales tax. Most of
use of independent agents or affiliates. When object” test, to determine what it is they are them will start out quarterly and then either move
entering into sales contracts with consumers actually being compensated for. In some cases, to monthly or annually, depending on sales levels.
from a new state, a company should perform companies may be using technology to deliver The returns should be filed in a timely manner
an analysis to determine if it has in fact created an information service, which can be taxable and remitted with payment of the collected trust
nexus within that state and is then required to or non-taxable depending on the state, delivery funds. Sales tax is based on the end user location,
potentially charge and remit sales tax. method, and underlying content. not the location of the company, and the end
user pays it. Sales tax is not an additional cost of
As an example, a company that is headquartered As general advice, the company should examine doing business since it is ultimately the consumer
in New York, with an employee in California, the contracts for what is being provided and who pays the tax.
and a co-location data center in Illinois, will then perform research on the taxability of
be considered to have nexus within New York, that transaction. Often this will require some With the barriers of doing business in states
California, and Illinois. Assuming no other judgment in determining the true object of the lower than ever, particularly for technology
physical activities (including trade shows, sales service and how it fits into current tax law. companies, understanding sales tax obligations
demonstrations, server hosting, among others) Luckily, continued uncertainty has led more is a difficult but necessary task. The laws can

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